tv [untitled] December 27, 2011 4:31pm-5:01pm EST
so back on november tenth we interviewed economist steve king who made a special stop in our studio when he had just flown in all the way from australia where he's based we took a look back at the financial crisis and why so many economists missed it keane is one who did not and has a scathing review for most of the economic profession in fact also of course the eurozone crisis was top news we took a look at lessons from the past about economic theory and practice were being learned here was some of our show. ok it's trivia time i am going to start the show by reading you a couple of quotes from two thousand and one and i want you to think about what
they have in common first as on the u.s. economy america could well join japan on the list of the global economies walking wounded mired in a debt induced recession with static or falling prices and a seemingly intractable burden of private debt ok this is what many people refer to as the last decade you can see a reference right there just from earlier this month and about europe when an economic crisis eventually strikes people's europe's governments may be compelled to impose austerity upon economies which will be in desperate need of a stimulus bit. and you just saw protests of course from austerity measures and in greece people on the streets protesting them so did you notice anything about those statements they were both from two thousand and one and there are compelling facts to show that both are playing out right now years later they came to fruition and both came from our next guest lucky for you both are examples of what many modern
economists missed and examples of what they may continue to miss because my guest says not a whole lot of thinking has changed he steve keen economics professor at the university of western sydney he's also author of this book debunking economics the naked and bird dethroned which just came out in its revised edition and he joins us here in the studio far from australia where he joined us from last time and we're so happy to have you here on the show and the wanted to be you really enjoy the view last time around and thank you we enjoyed it as well so did our viewers so let's start because i just gave a few examples of things that you got right well ahead of time things they're playing out right now economic problems also of course the financial crisis in two thousand and eight which you saw coming years ahead of time sticking on that you know in two thousand and nine after everything kind of got really bad people like paul krugman were writing columns saying how did economists miss it or you know how did they get it so wrong but you didn't get it wrong you got it right so why did so many economists miss it well really that's where the that's the important question
isn't while it's short coming because it's me seeing credibly all of the use of you take a look at what was happening the financial sector and take it seriously the reason economists didn't see it coming is they convinced themselves and crewman still believes this he wrote this in a research paper at the end of last year that the level of debt doesn't matter private to only worry about the level of government that might convince themselves that the level of profit that doesn't matter because a date is simply one person's asset another person's lot ability overall there's none that effect on the macro economy that is so fundamentally flawed and wrong but that's why they belong to it so they didn't even look at the major indicator that i took seriously way by. setting back and not in ninety seven frankly but certainly in two thousand and five which is the russian private too. and when i saw that rising exponentially i thought holy hell there's a gigantic crosses coming at trying to con continue when it breaks we'll have the biggest process possibly since the great depression somebody has to rise the obama and i'm on probably that somebody and the debt to g.d.p.
and just debt in general is the issue that really all of the economic problems that we're talking about every day in europe and in the u.s. is really surrounded upon so i guess the question becomes as leading up to the financial crisis in two thousand and eight you know we heard policymakers like ben bernanke be applauding economists and saying that the great moderation was in large part due to there was something you wrote about due to their good economic policy that sort of thing if they all missed this is the problem that we're seeing now the economic problems we see a result of the fact that these are the people that are still policymakers and advising policymakers you know a lot of numbers just for the new pipe we're making this is for the news pipe of the saying that normally when you're fully the boss of the experts what have you trying to work with expect it to go to the doctor you follow the advice of your health improves we follow the advice of the economists in the economy tanks completely so it's a song then not really exposed on the economy the rick spots on the model of the
economy on the great tragedy is that model is almost completely irrelevant to the system we actually live in but it's plausible enough for them to fall for it and believe that it's correct so they did all these things that said let's improve the right of inflation let's let's keep the right inflation under control and that will make the economy originalist stable equilibrium they favors the buzzword is equilibrium like to see you pull that one apart and one of your next would say. put it on my list but the but the thing is capitalism the good thing about capitalism is not equilibrium the good stuff about capitalism is instability and when stability and flaws innovation and shines which is the positive side. but on the other side of that would also an intense is financial innovation and speculation and unfortunately that is destructive and by focusing on the equilibrium and ignoring both the good and the bad instability of capitalism it unleashed the bad instability because they were basically. trying frankenstein's monster which is the
finance sector the finance sector is a bank in science frankenstein's monster you know arguably not a whole lot about the financial sector has changed if you listen to critics of dodd frank he says that it hasn't gone far enough yeah after all the lessons that have come out of two thousand and eight lessons like you point out in your book why has never been gone back to the drawing board and rethought the very models you're talking about fundamentally momentum there's such a degree of them into the hundred thousand and six and now that we if you go back in the one in forty five the finance sector was a trivial part of the american economy which is what it should be the real heart of america's always been the industrial innovative side of it and that was far more important back in the eighty's forty five to sixty five than it is now but the finance sector in it and they simply grew because we still made it possible to gamble on rising asset process and that's what sucks us into taking on too much did use is if you go to the dentist and have a tooth you'll get the tooth pulled you won't get any more tooth pulled than that
because it's not nice to your teeth pulled unless the dentist manages to convince you that you look sick see it with a list teeth i don't think anyone can convince me of that i'm sure but that's what that's about the economists that's what thought the financial sector can this is about it that's a bad thing to be in leverage is not a good thing to have because you go to out of income but they persuade you it's good because the leverage will increase your gains on rising us at markets but in fact this rossin debt that's cause is the rising us of markets speak of course in a positive feedback loop the trick is to this unbelievable level of profit to three hundred percent of g.d.p. was the peak america picked up it's now folding drastically public debt is less than one third that level even now. so it's the private debt bubble that caused all the trouble in the roaming slang there and and now what we're seeing is this on wanting to win the front of city generates that much did they get enormous political power as well and breaking at the mention takes forever we have to get to the star age where a publication has the guts and courage and independence that roosevelt had back in
the not in thirty's to say putting the banks in the dog window putting him in the driver's seat take the banks out of the drivers you know that's about oh sorry go ahead. bill black needs to be that somebody had the guts to take them on during the lunch process you know somebody like that and you need a politician to back them up currently we have need them and that's the political side of it but you also argue that economists and the people that are there advising policy that they need to change to write well you know i mean the i'm waiting for max planck talked about in the buy side of a program suppose in a discipline he said progress in one funeral that is time and neoclassical economists the never going to die off the unfortunately you cannot persuade people who believe the mythical vision of reality and weave that their whole lives is dedicated to believing that why do you talk to crew when i have a lot of time for christmas policy conclusions but his analysis sidelocks him into a way of thinking about the world that he thinks is the only way i can analyze the economy they always fall back to it so my favorite there is all of a bland showed a little child who was head of the imus economic wing and was the founding editor
of the american economic reviews macroeconomics journal and beck and of all things in two thousand and he came out and said the state of macro was good talking about macro economic theory one year after the process began so these are the kind of thought that were going on even right up to the crisis there's so much more we want to get to on this and we're going to talk to ed right after the break we have to get to a word of the day that i know you wouldn't want are going to looking at it that we'll have more with steve cannane just a minute. all right it's time now for word of the day where i break down a financial term or concept for our very smart of your but perhaps not the financial expert in the audience so we're stopper us because we wouldn't want to miss his opportunity to give us the word of the day and it is your word of the day
or you're going to look for report of the day thank you it's mine to stop for a lot closer all right feel later all right word of the day is. ok it's kind of a thing it's the minsky moment and this is very exciting because it's something that i want to talk about with my guest in just a minute and it's what you see in this clip from the new movie margin call it depicts a minsky moment for the financial system take a look at this. how long would it take to clear that up remember you. were. so old so that you're showing something that you know. we made sure. so you can get the vibe that this was a good deed there for the definition which is something very dramatic so what is it minsky moment it's one of markets fails or falls into crisis after an extended period of market speculation and unsustainable growth minsky moment is based on the idea that periods of speculation if they last long enough will eventually lead to
a crisis the longer speculation occurs the worse the crisis will be now it's named after an economist and professor minsky if you're curious where the term came from and as far as a minsky moment in order to have this type of event you have to have excessive speculation which is fueled by overborrowing and overspending prices are bid up like that because people are able to borrow money so let's take just a look at credit market debt so you can see how this has been so what we see here is how credit market debt has expanded over the course of decades you can see how it expanded leading up until the great depression we saw this huge growth and credit and leading up to the financial crisis in september two thousand and eight we saw that as well so in both cases investors and speculators alike realizes that prices could not continue to rise indefinitely and so they began to sell and that was what economists like i believe dr steve keen say was a minsky moment and because everyone was so overloaded bridge when they began to
sell prices began to decline and people started to go bankrupt charts are not always the easiest way to describe it so let's take a look at this so essentially this is what was going on everyone was using credit which is this boulder and speculating and in doing that they were pushing prices they were pushing this boulder up the hill and prices were going up and the further and further they want to the higher prices went but this bolder of debt was getting heavier and heavier until enough people. realize that both the debt and how high these prices were was not sustainable so they're like oh that boulder and once you let that go you can only imagine this looks like a very big boulder it's very difficult to stop dare i say impossible like i said it's a pretty big boulder and that is the world after a minsky moment still ahead you've been an active audience watching and commenting on our show asking questions coming up after the break we will respond. well to the. science technology innovations all the latest developments
as the euro zone debt crisis continues and we see prime ministers go we see new governments installed in order to please lenders please creditors moer austerity imposed really it's unclear where this is all headed and why this is all going on and there's a question of was this inevitable because as you heard our guest steve kean predicted a lot of this because of what he saw coming so he joins us again in the studio steve came professor and author of debunking economics which i've been reading studiously it's a great book everyone should read it so i obviously so much is going on with the euro zone crisis italy today some are saying is france what's going to be kind of the issue next with the french bond market and we see the former e.c.b.
i believe vice president who has been named to lead the greek unity government i mean prime ministers have come and gone more austerity measures have been enacted how do you see this whole situation that you're this close song there with the suicide notes when i saw the metrics pretty good even a small crosses would have destroyed the metric treaty the whole it was and it was because it was on the new classical economists live in a sadducee world which argues the capitalism if it has a need any downturns will of course want it and that what those they said is just a pair of rules about which was simply and signed the rules the good to the government could not explain sixty percent of g.d.p. but bear in mind with america the was running harder than that and government did right and private they did three hundred percent of it right right which they ignored. and also that the deficit knew you when you couldn't exceed three percent of g.d.p. what that meant was if they wanted to fund a deficit larger than that they had to raise money by going to the bond market they couldn't get the money off the central bank which is that applied in this in
america three quarters of the american budget were they need to be funded by the american government selling bonds not bank by the federal reserve so it's an insanely bad system guaranteed to follow that even with a small cross or so is no no brian with me to make a comment back in two thousand so again italy boils down to the economists and just for everybody that doesn't understand economics profession is this what everyone is trained in that is. economics has is a lot of sonce people think it's a saw and that's why the nobel prize which is a joke it's not a real nobel prize say that made up by the swedish bank rather than by the nobel committee but in a genuine sonce one has experimentation and a critical engagement with the data to see whether your theory fits or not in economics on fortunately because it's taught it without belief about a social system audiology has dominated moxon the previous school of ideology the close and that was the classical school to a critic of capitalism and the new classical coup who came along saying capitalism is wonderful and i try to prove that it's not just
a good social system but better than feudalism which is quite easy to stalin the socialism as well but they try to argue it's a perfect social system but that's just nonsense but they're there for design principles about it which presume it's perfect and of course it's not therefore it has to have crosses on the fundamental thing they ignore amazingly the people are trying to economics they ignore money now how can you one last capitalism when you ignore money through a question and i'm not a neo classical economist but i don't think i have to be one in order to understand that something there doesn't add up i guess the question becomes you say neo classical economists have to die off but we do see this movement occupy wall street obviously protesting wall street you've spoken at a dinner i am willing to speak again to anyone of any of the rally around the world to meet the fine. really challenging the hedge of money not just of the finance sector but also of conventional thinking about the economy well that's a question i have for you did they need to be occupying the economics departments of the university yes and in fact harvard university did this in
a sense just recently when students a ten percent of men queued gregory meant to use clos walk to walk out of these lectures a man q i'm sure he's a lovely guy but isn't in a classical economists is nonsense you siri is garbage in his book is trivial laws is a complex area and makes numerous economic mistakes he doesn't apparently know because he hasn't read the literature of economics and as often as i wrote in this particular edition of the book new york classical economists don't understand classical economics they don't even know their own area probably so that will count occupations things like that students around the world should be doing that and saying we want to learn other approaches to economics if you want to learn this particular approach waltz and all and believe me this is got lots of warts ok and the other thing too of course we've been talking about politics and the united states we saw another g.o.p. debate republican presidential hopefuls we've seen a lot of them they're out there talking about their jobs plan their tax plans their
why the u.s. is going to go the direction of italy or greece unless something changes do any of their plans matter and less they're prepared to fire their staff economists force them to erase the ph d.'s there have in their head and say i don't know read your book pretty much unfortunate because most of them in the they they treat the economy like a household with a very simple flow through money in money out the other saw a simple accounting system the economy is a very complex feedback system and if they do things like you know one of them talk about abolishing the education department of them give me a break you need education this country. raise a lot of education you know there's a debate of the public versus what the trouble is right at the back so what actually determine the outcomes not the direct impacts so they're putting forward not simple growth sound bad stuff that sounds good wins. wins elections perhaps some goes to the heartland of america but it's not describing a complex system which is the one that actually live in and it will make things worse small walk through them better and it sounds like the economists that are advising them as well strike marketing bring it out either that's all we have time
for we are so happy that we had you here on the show thank you so much for being there that was professor steve king is also author of debunking economics. all right time for viewer feedback a chance for us to respond to your comments and questions and our conversation with steve keen and cited a really interesting discussion about the state of education and especially economic education and the next three five one six said occupy the universities is again a sound like a good idea our local university has turned into a breeding ground for the next generation of elites while the student loan bubble
is driving up to wish and costs and will assure that the graduates remain in debt for ever as they search for non existant jobs now you bring up a lot of really great points and if you take a look at this chart right here you can see just how much student debt has exploded student loans have doubled in the past decade as you can see right there and as of june two thousand and ten total student loan debt passed total credit card debt for the first time ever meanwhile to wishin is up eight point three percent this year for public colleges and twenty nine percent over the past five years for private universities and we all know how long and staggering this jobs crisis has been with the youth being disproportionately affected now or and of how wic talked about his economic education to give us our kind of boots on the ground student perspective this viewer said i got my degree in two thousand and eight discounting wasn't
questioned only the discount rate austrian economics wasn't even mentioned keynes was the man who explained why we don't need savings now students who feel their economics education is limited like that you obviously did could take the heckler seventy three is advice heckler seventy three said this taking up the banner of rebel economist i've personally steve keen's work to force professors to change the curriculum of the education system in my area more people need to do that prof keane is the steve by of economics there may be other guitar wizards out there but none that hit the new. it's like now if you don't know who steve is well very is there's a picture now we love to play with some of his music unfortunately we can't because of some legal reasons but if you go check it out on your own you will see how truly awesome this analogy is if you didn't already get it moving on lamb ram writes i'm guessing when you and steve can speak about economists not seeing the crisis coming
you mean mainstream right because peter schiff saw it marc fab or saw the austrian school of economics saw it and ron paul saw worn yelled wrote bills trying to stop it since zero three and before to answer your question yes we are talking about the mainstream conventional wisdom that inspired articles like this one this two thousand and nine article by paul krugman was entitled how did economists get it so wrong and it goes on to point out few economists saw our current crisis coming more important was the profession's blindness to the very possibility of catastrophic failures in a market economy now as our viewer points out people did see this coming and our viewer mentioned ron paul and looking back to september two thousand and three you can see an example where he warned of the housing bubble and crisis he said in the house financial services committee despite the long term damage to the economy inflicted by the government's interference in the housing market the government's policy of diverting capital to other uses creates a short term boom in housing like all artificially created bubbles the boom in
housing prices cannot last forever when housing prices fall homeowners will experience difficulty as their equity is wiped out furthermore the holders of the mortgage debt will also have a loss these losses will be greater than they would have otherwise been had government policy not actively encouraged over investment in housing the more people invested in the market the greater the effects across the economy when the bubble burst that was back in two thousand and three and listen to joe scarborough asking him why he saw it coming. how could it be that you knew this well the banking committee in two thousand and three and nobody else did until after the collapse why would i would think the easiest explanation is is that washington d.c. is permeated by keynesian economic thinking. moving on to where is my bailout t.v. ads you can argue economics all day long there's one key fact that nobody's dealing
with i agree the debt will never be paid off yes we should write it off however no politician anywhere in the world will publicly admit that if they do their careers over there for what's more important keeping their cushy job or doing the right thing now this year brings up a really important point because we're garlits of what you see as a solution to debt are the limitations that you think politicians have whether you agree with that view or not the fact is we're garbus an economic per script and theory there is a difference between ideology and political reality and at the end of the day that political reality is the world we live in and and that's all we have time for that's it for our show today thank you so much for watching you can continue to follow me on twitter at lauren lyster even though i'm on vacation from the show i certainly have not taken one for twitter you can also e-mail us your feedback and questions to go ahead and e-mail those to me at l. lister at r t t v america dot com also visit our youtube channel youtube dot com
with mike stronger for a no holds barred look at the global financial headlines tune into cars a report on our. download the official antti application to go on the phone on pod touch from the i choose ops to. launch on life on the go. see video on demand teasing blindfold costs and already says feeds now in the palm of your. question on the dot com.
i didn't read right on i didn't read them at the time and i disavow them. under attack the mainstream media has turned their fire power toward g.o.p. presidential hopeful ron paul so with one week until the iowa caucus why is the grand thinker of the party under siege. it's three agencies of government when i get there that are gone commerce education and the what's the third one there let's see how. well do you know who is the best fit for the commander of commander in chief today will determine how voters will be capable of making an.